Fitch on SubPrime: Losses High, Write-offs Finished

Fitch Ratings has released a Special Report: Subprime Mortgage-Related Losses – A Moving Target which endorses the relatively high loss estimates of Greenlaw et al. and the IMF and contradicts the Bank of England Estimate.

Fitch, bless ’em, explicitly states that their calculation is restricted to the USD 1.4-trillion-odd of securitized subprime mortgage assets – one problem in drawing up comparable figures is determining whether the asset universes are comparable. Europe also went nuts over real-estate, particularly Spain and the UK!

Given the size of the subprime market, estimated to have originated as much as USD1.4trn of loans in the last three years (2005: USD625bn; 2006: USD600bn; and 2007: USD179bn), the poor underwriting standards deployed in originating these loans and the deteriorating economic environment, Fitch estimates total losses for the market to be in the region of USD400bn. Alternative methods of calculating the potential losses using index prices suggest potentially higher losses up to a high of USD550bn.

This compares with Greenlaw et al. (USD 400-billion); the IMF (USD 565-billion) [“Aggregate losses are on the order of $565 billion for U.S. residential loans (nonprime and prime) and securities and $240 billion on commercial real estate securities.”]; and the BoE (USD 170-billion by credit analysis vs. USD 381-billion by market price vs USD USD 317-billion by model-estimated credit-component of market price).

Of great interest to investors will be Fitch’s related conclusion that, notwithstanding that their estimate is on the low side of their mark-to-market range:

  • Approximately 50% of total subprime mortgage related losses, totalling USD200bn, are estimated to reside within the banking sector. The balance 50% of losses is distributed among financial guarantors, insurance companies, asset managers and hedge funds. To the extent that institutions have effectively
    hedged their exposures with financially sound counterparties, these loss estimates may be over‐estimated. However, in the absence of detailed disclosures, it is difficult to get an accurate estimate of net losses.

  • Reported losses by banks at USD165.3bn indicate that over 80% of losses stemming from ABS‐CDO and subprime RMBS exposures have been disclosed.
  • As a significant proportion of the losses have been disclosed, further ratings action arising from ABS‐CDO and subprime RMBS exposures is likely to be minimal.

It’s a good paper, with a fair amount of detail provided regarding how they calculated their numbers.

Update: As noted on March 11, Fitch is very proud of how tough they are on subprime:

The full Bloomberg story explains the Fitch discrepency a little better:

“We have built in 20 percent more home price declines from the end of ’07,” said Glenn Costello, managing director for residential mortgage-backed securities at Fitch. “When you build in that much home price decline, I feel good when I pick up the paper and I see that home prices are only down another 3 percent. My ratings are still good.”

2 Responses to “Fitch on SubPrime: Losses High, Write-offs Finished”

  1. […] This estimate may also be compared with Fitch’s earlier estimate of 21% on 2006 subprime, compared to 10% for 2005 and 26% for 2007 vintage. Fitch’s report has been discussed on PrefBlog. […]

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